The Productivity of Canada

Canada†s productivity is not in really good shape now. Among its G-7 partners (Britain, Japan, Germany, France, Italy and the U. S. ) , it has the lowest rate of growth in economic productivity over the past 25 years while it ranked second in productivity only to the U. S. two decades ago. What was the problem? Why was the situation getting worse and worse? While the problem seems to be getting more serious as the new millennium approaches, Jean Chretien, the Prime Minister, and Paul Martin, the Finance Minster, have played down the productivity issue, saying there is no clear-cut evidence that it is a significant problem. In fact, the high income tax rate compared to the U. S. causes lower salary for those highly skilled workers, which leads to their departure for better pay and more opportunities in the U. S. Also, the Canadian federal government spends too much money on themselves such as building political empires and providing services that duplicate those delivered by other provincial or municipal governments. Besides, Canada has a poor performance particularly in areas related to technology and communication industries. We certainly need a lot more to be done to improve productivity from various sources. Before we can come up with effective solutions for this controversial issue, we need to know how does productivity affect our economy and the standard of living in our country. Productivity measures the capacity of the economy to increase its output while costs are controlled. As economic efficiency increases, the overall wealth produced by the economy also goes up. It also determines the purchasing power that Canadians have. The greater productivity, the greater the potential for economic growth. With the decrease in productivity, our standard of living may go down as well. Canadians† living standard grew by an average of 3. 1 percent a year from 1961 to 1980. Since then, growth has averaged only 1. 1 percent annually. The major reason for this shutdown can be criticized on slower productivity growth. Lower labour productivity has explained 96% on average of the Canada-U. S. standard of living gap over the last decade. The atrophy of Canada†s productivity causes damages to the country†s living standard. Stronger productivity growth is essential for higher living standards in a country. One possible solution is tax cut, particularly on income tax. High tax rates hurt Canada in many different ways. Most of the Canadian companies cannot afford to hire an American executive to come north because the U. S. wage rates are significantly higher and the tax rate is different. If they do so, they should expect to pay an American executive the double salary compare to the outgoing Canadian executive earned. In that case, it would be too expensive. Although larger companies can probably afford it, while some smaller companies can†t afford to bring in talent that they need to expand their business. Moreover, the growing tax gap makes the situation even worse. This is also one of the reasons why Canada†s poor economy performance during recent years. Also, the Canadian dollar is weaker than the U. S. dollar, therefore income tax rate turns out to be around 50% for top earners compared to Canada with about 35% in the U. S. The other problem with over taxation is, when governments have too much of our money by collecting tax, which is in the case of Canada, the federal government spend too much on themselves, on building political empires and providing services that duplicate those delivered by other provincial or municipal governments. If taxpayers have this money left over to spend, they will probably either spend it or invest which will have a positive impact on our economy. But one exceptional case is high-tech industries in Montreal. Tax credits those companies, which allure them to invest more money. Eventually, the government provides up to $15,000 for new jobs in tax credits for each employee†s annual salary in future ten years. Those subsidies convinced Illinois-based Motorola to locate a new software center in Montreal. However, the critics argued that the government is buying jobs by using other taxpayer†s money and causing higher taxes for others. But in general, higher tax rate in Canada is a non-questionable fact. Another improvement that should be made is to put more money on education and provide a stable and attractive working environment for highly trained graduates. The loss of these highly trained graduates, estimated in the thousands annually to the U. S. The more opportunities, higher salaries and lower taxes are the main reason to draw their attention. Besides, there are not enough well trained and highly educated people to teach at universities and specialized schools, skilled Canadians who leave because of better pay and more job opportunities elsewhere. Besides, numbers of Canadians are willing to study in the U. S every year. In 1997, 23,000 of them enrolled in American colleges and universities. But there were only 18,000 Canadians enrolled in U. S. universities about 10 years ago. This number has been increased over the past decade and it certainly is going to increase if we don†t do anything about it. Another thing is, the American companies spend large amounts of money on re-training and development on executives. The average company spent about $10 million on both internal and external executive development in 1998. Especially when technology is becoming more and more involving business, the ability to get up to date information and knowledge is the key to success. In a recent survey that is done by Business Week, the best in management education, ranked according to this survey. U. S. has 17 universities in the top 20 for non-degree study. Although this was not an official ranking, it still shows that the U. S has most of the top business schools in the world, such as Harvard, Michigan, and Pennsylvania. That†s also why many students around the world, not just Canadians, like to go to those universities, because they can have a better education and a brighter future. Technology is crucial for productivity too, since Canada has done a poor job in technology and to support those technological talents. Just like Anand Bahl and Kim Cameron, they decided to be part of high-tech talent to the U. S and they sold their privately owned software company, Zoomit Corp. of Toronto, to Microsoft. Anand Bahl and Kim Cameron actually didn†t look for a buyer; somewhat Microsoft approached them as they found their company has potential in market. Anand Bahl and Kim Cameron created a software program, which from the e-mail system called the â€Å"meta-directory† which allows companies to integrate and manage a variety of related computer files, images and applications from different suppliers. They couldn†t get any finance help in Canada and not many people could understand the technology and expected their company to get beaten by a bigger player and wiped out. In fact, their product works and even Microsoft hire them along with 11 of 30 Zoomit†s employees to work on integrating meta-directory software into Windows 2000. They were very happy to be accepted from the world†s largest and most powerful firm because they had such a struggle to try to prove their product. They criticized the attitude that they encountered in Canada which Canadian companies assumed the product wasn†t good enough and they forced to focus on the U. S. which right now about 90% of their sales revenue come from large American companies. The comment that they gave was Canada has world class programming talent, but they have to have a chance and somehow recognize by others, and talent is one of the few things Canada will have left if we let this situation gets worse. In the case of Ford Canada, they have increased the wages for the workers because they are doing great business. But some economists worry that the raise of wages will lead to an increase in the unit price of cars and trucks, which is unlikely the case. In fact, the increase in Ford†s hourly labour cost will certainly lag behind the ongoing growth of productivity. Productivity in auto assembly grew 80% between 1991 and the first quarter of 1999, almost 10 times as fast as the total economy. In general, productivity in car industry has been increased 20% since 1991 . The amazing thing is that auto assembly average productivity even exceeds the level in the U. S. According to the bible of automotive productivity studies, it takes about 25 hours of labour to assemble a vehicle in Canada, which is 10% less than in the U. S. Moreover, this superb productivity performance produced 34,000 new jobs in the industry since 1992. The key for their success is they put huge investment in fixed capital that have been made by the auto assemblers and their parts suppliers. They are investing more than $4 billion on new equipment every year. As a result so far, new equipment with new technology makes greater productivity and better quality. From what has been mentioned above, the fact that Canada†s productivity needs to be improved, and the government should put more effort on it. Canada must solve the productivity problem through massive tax cuts and increase budgets on both education and technology development or continue to lose talents to the U. S. while we†ll have poorer productivity and competition in the market.